CULLEN/FROST BANKERS, INC. [CFR] Filings

10-Q 1 cfr-20230930.htm 10-Q cfr-20230930

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________ to ________________

Commission file number: 001-13221

Cullen/Frost Bankers, Inc.

(Exact name of registrant as specified in its charter)

Texas

74-1751768

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

111 W. Houston Street,

San Antonio,

Texas

78205

(Address of principal executive offices)

(Zip code)


	(210)	220-4011
(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on
which registered

Common Stock, $.01 Par Value

CFR

New York Stock Exchange

Depositary Shares, each representing a 1/40th interest in a share of 4.450% Non-Cumulative Perpetual Preferred Stock, Series B

CFR.PrB

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 20, 2023, there were 64,047,190 shares of the registrant’s Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

September 30, 2023

Table of Contents


		Page
Part I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65

Part II - Other Information
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities , Use of Proceeds, and Issuer Purchases of Equity Securities	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

Signatures		68

Table o f Contents

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Cullen/Frost Bankers, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)


	September 30, 2023		December 31, 2022
Assets:
Cash and due from banks	$	574,654	$	691,553
Interest-bearing deposits	6,955,779		11,128,902
Federal funds sold	3,000		120,527
Resell agreements	84,650		87,150
Total cash and cash equivalents	7,618,083		12,028,132
Securities held to maturity, net of allowance for credit losses of $310 at September 30, 2023 and $158 at December 31, 2022	3,628,123		2,639,083
Securities available for sale, at estimated fair value	16,117,089		18,243,605
Trading account securities	29,341		28,045
Loans, net of unearned discounts	18,399,259		17,154,969
Less: Allowance for credit losses on loans	(242,235)		(227,621)
Net loans	18,157,024		16,927,348
Premises and equipment, net	1,166,544		1,102,695
Accrued interest receivable and other assets	2,030,818		1,923,468
Total assets	$	48,747,022	$	52,892,376

Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	14,631,456	$	17,598,234
Interest-bearing deposits	26,360,779		26,355,962
Total deposits	40,992,235		43,954,196
Federal funds purchased	25,950		51,650
Repurchase agreements	3,722,245		4,660,641
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	123,112		123,069
Subordinated notes, net of unamortized issuance costs	99,452		99,335
Accrued interest payable and other liabilities	784,277		866,257
Total liabilities	45,747,271		49,755,148

Shareholders’ Equity:
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 150,000 Series B shares ($1,000 liquidation preference) issued at September 30, 2023 and December 31, 2022	145,452		145,452
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,404,582 shares issued at September 30, 2023 and 64,354,695 at December 31, 2022	644		643
Additional paid-in capital	1,043,865		1,029,756
Retained earnings	3,626,799		3,309,671
Accumulated other comprehensive income (loss), net of tax	(1,778,827)		(1,348,294)
Treasury stock, at cost; 387,679 shares at September 30, 2023	(38,182)		—
Total shareholders’ equity	2,999,751		3,137,228
Total liabilities and shareholders’ equity	$	48,747,022	$	52,892,376

See accompanying Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest income:
Loans, including fees	$	307,035	$	205,932	$	867,302	$	522,588
Securities:
Taxable	103,875		68,311		303,610		167,734
Tax-exempt	56,918		59,450		184,189		173,394
Interest-bearing deposits	91,904		74,257		278,897		106,971
Federal funds sold	183		316		1,246		428
Resell agreements	1,197		64		3,391		78
Total interest income	561,112		408,330		1,638,635		971,193
Interest expense:
Deposits	138,779		42,682		357,034		62,187
Federal funds purchased	288		249		1,283		336
Repurchase agreements	33,195		7,529		99,960		9,837
Junior subordinated deferrable interest debentures	2,260		1,159		6,354		2,515
Subordinated notes	1,164		1,164		3,492		3,492
Total interest expense	175,686		52,783		468,123		78,367
Net interest income	385,426		355,547		1,170,512		892,826
Credit loss expense	11,185		—		30,190		—
Net interest income after credit loss expense	374,241		355,547		1,140,322		892,826
Non-interest income:
Trust and investment management fees	37,616		38,552		113,152		114,984
Service charges on deposit accounts	23,603		22,960		68,969		69,570
Insurance commissions and fees	13,636		13,152		45,528		41,536
Interchange and card transaction fees	4,672		4,614		14,811		13,751
Other charges, commissions, and fees	13,128		11,095		36,922		30,609
Net gain (loss) on securities transactions	12		—		66		—
Other	13,331		9,448		35,343		28,688
Total non-interest income	105,998		99,821		314,791		299,138
Non-interest expense:
Salaries and wages	137,562		127,189		401,102		355,399
Employee benefits	26,527		21,680		87,241		66,633
Net occupancy	31,581		28,133		93,644		83,923
Technology, furniture, and equipment	35,278		30,781		100,802		89,859
Deposit insurance	6,033		4,279		18,480		11,636
Other	56,275		45,836		162,171		135,527
Total non-interest expense	293,256		257,898		863,440		742,977
Income before income taxes	186,983		197,470		591,673		448,987
Income taxes	31,332		27,710		96,251		61,011
Net income	155,651		169,760		495,422		387,976
Preferred stock dividends	1,668		1,668		5,006		5,006
Net income available to common shareholders	$	153,983	$	168,092	$	490,416	$	382,970

Earnings per common share:
Basic	$	2.38	$	2.60	$	7.56	$	5.92
Diluted	2.38		2.59		7.54		5.90

See accompanying Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	155,651	$	169,760	$	495,422	$	387,976
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	(600,441)		(829,324)		(547,035)		(2,376,642)
Change in net unrealized gain on securities transferred to held to maturity	(164)		(174)		(486)		(572)
Reclassification adjustment for net (gains) losses included in net income	(12)		—		(66)		—
Total securities available for sale and transferred securities	(600,617)		(829,498)		(547,587)		(2,377,214)
Defined-benefit post-retirement benefit plans:

Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	869		741		2,609		2,223
Total defined-benefit post-retirement benefit plans	869		741		2,609		2,223
Other comprehensive income (loss), before tax	(599,748)		(828,757)		(544,978)		(2,374,991)
Deferred tax expense (benefit)	(125,948)		(174,038)		(114,445)		(498,748)
Other comprehensive income (loss), net of tax	(473,800)		(654,719)		(430,533)		(1,876,243)
Comprehensive income (loss)	$	(318,149)	$	(484,959)	$	64,889	$	(1,488,267)

See accompanying Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Treasury Stock		Total
Three months ended:
September 30, 2023
Balance at beginning of period	$	145,452	$	644	$	1,040,754	$	3,532,542	$	(1,305,027)	$	(27,623)	$	3,386,742
Net income	—		—		—		155,651		—		—		155,651
Other comprehensive income (loss), net of tax	—		—		—		—		(473,800)		—		(473,800)
Stock option exercises/stock unit conversions (8,483 shares)	—		—		—		(217)		—		813		596
Stock-based compensation expense recognized in earnings	—		—		3,111		—		—		—		3,111
Purchase of treasury stock (111,956 shares)	—		—		—		—		—		(11,372)		(11,372)

Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)	—		—		—		(1,668)		—		—		(1,668)
Cash dividends – common stock ($0.92 per share)	—		—		—		(59,509)		—		—		(59,509)
Balance at end of period	$	145,452	$	644	$	1,043,865	$	3,626,799	$	(1,778,827)	$	(38,182)	$	2,999,751

September 30, 2022
Balance at beginning of period	$	145,452	$	642	$	1,015,451	$	3,070,109	$	(874,206)	$	(10,473)	$	3,346,975
Net income	—		—		—		169,760		—		—		169,760
Other comprehensive income (loss), net of tax	—		—		—		—		(654,719)		—		(654,719)
Stock option exercises/stock unit conversions (88,350 shares)	—		—		—		(1,918)		—		7,188		5,270
Stock-based compensation expense recognized in earnings	—		—		3,173				—		—		3,173


Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)	—		—		—		(1,668)		—		—		(1,668)
Cash dividends – common stock ($0.87 per share)	—		—		—		(56,319)		—		—		(56,319)
Balance at end of period	$	145,452	$	642	$	1,018,624	$	3,179,964	$	(1,528,925)	$	(3,285)	$	2,812,472

See accompanying Notes to Consolidated Financial Statements

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Treasury Stock		Total
Nine months ended:
September 30, 2023
Balance at beginning of period	$	145,452	$	643	$	1,029,756	$	3,309,671	$	(1,348,294)	$	—	$	3,137,228
Net income	—		—		—		495,422		—		—		495,422
Other comprehensive income (loss), net of tax	—		—		—		—		(430,533)		—		(430,533)
Stock option exercises/stock unit conversions (72,496 shares)	—		1		1,463		(736)		—		2,314		3,042
Stock-based compensation expense recognized in earnings	—		—		12,646		—		—		—		12,646
Purchase of treasury stock (410,288 shares)	—		—		—		—		—		(40,496)		(40,496)

Cash dividends – Series B preferred stock (approximately $33.38 per share which is equivalent to approximately $0.83 per depositary share)	—		—		—		(5,006)		—		—		(5,006)
Cash dividends – common stock ($2.66 per share)	—		—		—		(172,552)		—		—		(172,552)
Balance at end of period	$	145,452	$	644	$	1,043,865	$	3,626,799	$	(1,778,827)	$	(38,182)	$	2,999,751

September 30, 2022
Balance at beginning of period	$	145,452	$	642	$	1,009,921	$	2,956,966	$	347,318	$	(20,744)	$	4,439,555
Net income	—		—		—		387,976		—		—		387,976
Other comprehensive income (loss), net of tax	—		—		—		—		(1,876,243)		—		(1,876,243)
Stock option exercises/stock unit conversions (232,612 shares)	—		—		—		(6,695)		—		18,455		11,760
Stock-based compensation expense recognized in earnings	—		—		8,703		—		—		—		8,703
Purchase of treasury stock (7,459 shares)	—		—		—		—		—		(996)		(996)

Cash dividends – Series B preferred stock (approximately $33.38 per share which is equivalent to approximately $0.83 per depositary share)	—		—		—		(5,006)		—		—		(5,006)
Cash dividends – common stock ($2.37 per share)	—		—		—		(153,277)		—		—		(153,277)
Balance at end of period	$	145,452	$	642	$	1,018,624	$	3,179,964	$	(1,528,925)	$	(3,285)	$	2,812,472

See accompanying Notes to Consolidated Financial Statements

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)


	Nine Months Ended September 30,
	2023		2022
Operating Activities:
Net income	$	495,422	$	387,976
Adjustments to reconcile net income to net cash from operating activities:
Credit loss expense	30,190		—
Deferred tax expense (benefit)	(3,047)		(3,378)
Accretion of loan discounts	(13,074)		(10,572)
Securities premium amortization (discount accretion), net	50,614		76,328
Net (gain) loss on securities transactions	(66)		—
Depreciation and amortization	56,257		53,303
Net (gain) loss on sale/write-down of assets/foreclosed assets	(194)		109
Stock-based compensation	12,646		8,703
Net tax benefit from stock-based compensation	583		2,894
Earnings on life insurance policies	(2,164)		(1,561)
Net change in:
Trading account securities	(1,020)		154
Lease right-of-use assets	17,347		18,151
Accrued interest receivable and other assets	55,440		(63,382)
Accrued interest payable and other liabilities	(137,088)		71,187
Net cash from operating activities	561,846		539,912
Investing Activities:
Securities held to maturity:
Purchases	(1,147,624)		(878,434)
Maturities, calls and principal repayments	154,465		557,901
Securities available for sale:
Purchases	(13,445,382)		(6,702,519)
Sales	1,904,067		—
Maturities, calls and principal repayments	13,073,663		1,140,939
Proceeds from sale of loans	2,215		2,365
Net change in loans	(1,257,033)		(617,981)
Benefits received on life insurance policies	1,000		1,332
Proceeds from sales of premises and equipment	1,282		47
Purchases of premises and equipment	(118,062)		(55,635)
Proceeds from sales of repossessed properties	583		2,585
Net cash from investing activities	(830,826)		(6,549,400)
Financing Activities:
Net change in deposits	(2,961,961)		3,864,490
Net change in short-term borrowings	(964,096)		(657,785)
Proceeds from stock option exercises	3,042		11,760
Purchase of treasury stock	(40,496)		(996)
Cash dividends paid on preferred stock	(5,006)		(5,006)
Cash dividends paid on common stock	(172,552)		(153,277)
Net cash from financing activities	(4,141,069)		3,059,186
Net change in cash and cash equivalents	(4,410,049)		(2,950,302)
Cash and cash equivalents at beginning of period	12,028,132		16,583,000
Cash and cash equivalents at end of period	$	7,618,083	$	13,632,698

See accompanying Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(Table amounts in thousands, except for share and per share amounts)

Note 1 - Significant Accounting Policies

Nature of Operations. Cullen/Frost Bankers, Inc. (“Cullen/Frost”) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets. The terms “Cullen/Frost,” “the Corporation,” “we,” “us” and “our” mean Cullen/Frost Bankers, Inc., and its subsidiaries, when appropriate. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, insurance, brokerage, mutual funds, leasing, treasury management, capital markets advisory and item processing.

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2022, included in our Annual Report on Form 10-K filed with the SEC on February 3, 2023 (the “2022 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments and the status of contingencies are particularly subject to change.

Cash Flow Reporting. Additional cash flow information was as follows:


	Nine Months Ended September 30,
	2023		2022
Cash paid for interest	$	435,099	$	71,848
Cash paid for income taxes	97,000		78,500
Significant non-cash transactions:
Unsettled securities transactions	276		470,813


Right-of-use lease assets obtained in exchange for lessee operating lease liabilities	9,964		23,959

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.

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Note 2 - Securities

Securities - Held to Maturity. A summary of the amortized cost, fair value and allowance for credit losses related to securities held to maturity as of September 30, 2023 and December 31, 2022 is presented below.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses		Net Carrying Amount
September 30, 2023

Residential mortgage-backed securities	$	1,258,155	$	—	$	113,142	$	1,145,013	$	—	$	1,258,155
States and political subdivisions	2,368,778		48		283,585		2,085,241		(310)		2,368,468
Other	1,500		—		63		1,437		—		1,500
Total	$	3,628,433	$	48	$	396,790	$	3,231,691	$	(310)	$	3,628,123
December 31, 2022

Residential mortgage-backed securities	$	526,122	$	—	$	65,322	$	460,800	$	—	$	526,122
States and political subdivisions	2,111,619		13,048		119,033		2,005,634		(158)		2,111,461
Other	1,500		—		69		1,431		—		1,500
Total	$	2,639,241	$	13,048	$	184,424	$	2,467,865	$	(158)	$	2,639,083

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. The carrying value of held-to-maturity securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $811.4 million and $256.3 million at September 30, 2023 and December 31, 2022, respectively. Accrued interest receivable on held-to-maturity securities totaled $22.9 million and $30.2 million at September 30, 2023 and December 31, 2022, respectively and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.

From time to time, we have reclassified certain securities from available for sale to held to maturity. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income in the accompanying balance sheet totaled $1.3 million ($1.0 million, net of tax) at September 30, 2023 and $1.8 million ($1.4 million, net of tax) at December 31, 2022. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

The following table summarizes Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity securities issued by States and political subdivisions and other securities as of September 30, 2023 and December 31, 2022:


	States and Political Subdivisions
	Not Guaranteed or Pre-Refunded		Guaranteed by the Texas PSF		Guaranteed by Third Party		Pre-Refunded		Total		Other Securities
September 30, 2023
Aaa/AAA	$	301,822	$	1,542,919	$	13,653	$	1,091	$	1,859,485	$	—
Aa/AA	503,190		—		6,103		—		509,293		—

Not rated	—		—		—		—		—		1,500
Total	$	805,012	$	1,542,919	$	19,756	$	1,091	$	2,368,778	$	1,500
December 31, 2022
Aaa/AAA	$	273,201	$	1,422,442	$	—	$	121,961	$	1,817,604	$	—
Aa/AA	294,015		—		—		—		294,015		—

Not rated	—		—		—		—		—		1,500
Total	$	567,216

CULLEN/FROST BANKERS, INC. [CFR] Filings

CULLEN/FROST BANKERS, INC. [CFR-PB] Filings